Obligation of respondents to freezing order to assist in tracing claim

Lucy Hayes

The respondents to a freezing order, who were alleged fraudsters, had been ordered to create an affidavit detailing payments received by them.  They argued that they were not obliged to hand over any such information until the applicant particularised its case.  They also asserted that the court had no jurisdiction to make such an order in this case.  The court disagreed, and ordered that the respondents should provide an affidavit containing a wide range of information in order to assist the applicant’s tracing claims.

The court also allowed the “ordinary course of business” exception to be removed from the freezing order (BDW Trading Ltd v Fitzpatrick and another).

Background

Michael Fitzpatrick was an employee of BDW Trading Limited (“BDW”), the principal operating company of the Barratt Group.  Mr Fitzpatrick is also the director and sole shareholder of the second respondent, Top Constructions Services Limited (“TCS”, and together with Mr Fitzpatrick “the Respondents”).

BDW alleged that the Respondents had been receiving bribes or secret profits from certain subcontractors in return for ensuring that they won contracts with BDW.  The evidence BDW put before the court included sums totalling £1 million being paid into TCS’s bank account by subcontractors of BDW over the previous two years.  TCS had generated significant turnover and profits despite the fact that it had no obvious business activity, and that its sole director and shareholder was employed full-time by BDW.  Mr Fitzpatrick’s spending was “well beyond what could reasonably be supported by his salary”; he had provided sums of money in excess of £450,000 to his parents and his wife, and purchased a house and expensive cars.  BDW had also become aware of a personal email account Mr Fitzpatrick was using to communicate with certain subcontractors.  Mr Fitzpatrick had not disclosed the existence of TCS nor his relationship with the subcontractors to BDW.

On the basis of the strong prima facie case that fraud had taken place, Newey J made a freezing order against the Respondents (the “Order”).  He also ordered the Respondents to provide an affidavit explaining the nature, value, what had become of, and who now held, assets derived from money received from BDW’s subcontractors.  Mr Fitzpatrick responded to this aspect of the Order with a bare denial and no other information.  This hearing, before HHJ Behrens, was the return date at which the Respondents challenged a number of aspects of the Order.

Issues

BDW asserted that the direction to produce the affidavit could be justified on three grounds:

  • as ancillary to the freezing order (International Fund for Agricultural Development v Jazayeri (unreported, 8 March 2001));
  • under the court’s equitable jurisdiction; or
  • under the jurisdiction in Norwich Pharmacal v Customs and Excise Commissioners [1974] AC 133.

The Respondents challenged this order, claiming that the decision of Morrison J in Jazayeri was inconsistent with Den Norske Bank v Antonatos [1999] QB 271.  Den Norske Bank established that a witness was entitled to claim privilege in relation to evidence which could be relied on for a subsequent decision to prosecute.  The Respondents additionally argued that there was no difference between the equitable jurisdiction and the Norwich Pharmacal jurisdiction, and so the order must be justified under the tests set out in Norwich Pharmacal and subsequent cases.

Additionally, BDW requested that the “ordinary course of business” exception (which permitted TCS to deal with or dispose of any of its assets in the ordinary and proper course of business) be removed from the freezing order, as it had been given no evidence as to what TCS’s business was.  The Respondents submitted that this was disproportionate as it is standard wording for a freezing order.

Finally, BDW sought the relaxation of undertakings it had given not to use any information obtained via the affidavit in “any civil or criminal proceedings… other than this claim”.  Mr Fitzpatrick objected on the basis that dissemination of this information within BDW’s business would damage his reputation, potentially unfairly.

Judgment

HHJ Behrens dismissed the Respondents’ arguments.

He held that there was a distinction between the equitable and Norwich Pharmacal jurisdictions (Murphy v Murphy [1999] 1 WLR 282), and that the order for the affidavit was justified under the equitable jurisdiction.  The tests in Norwich Pharmacal and related cases were therefore not relevant.

BDW had a proprietary remedy and a potential tracing remedy in relation to any bribes, and so was entitled to take steps to try and trace the funds (Bankers Trusts Co v Shapira [1980] 3 All ER 353).  It had no other method of finding out what had happened to the money.  The limits of this jurisdiction are set out in Arab Monetary Fund v Hashim (No 5) [1992] 2 All ER 911; the court should balance the invasion of the respondent’s privacy with the prospect that the information may enable the applicant to recover their assets.  However, this balancing exercise is “of limited importance where, as here, the information is sought from the wrongdoer”.

Accordingly, the judge upheld the order for the affidavit, subject to a modification that it applied only to sums received in excess of £5,000.

The judge considered the “ordinary course of business” exception where the applicant potentially has a proprietary remedy.  He stated that there had to be a careful balancing exercise between the injustice of permitting the use of the funds by the Respondents if they had been fraudulent, against the possible injustice to the Respondents if they were innocent.  However, where no information had been given about the legitimate business activities of TCS, it was hard to perform that exercise.  He therefore removed the exception from the order, save for tax liabilities which had been disclosed by the Respondents.

Finally, in relation to the confidentiality provisions, the judge stated that it was clear that the information could be used to trace funds and in potential actions against the subcontractors.  He considered that it would be “artificial to permit the information to be used against the subcontractors who made the secret payments but not against Mr Fitzpatrick who received them”, and granted the applicant’s order.

BDW Trading Ltd v Fitzpatrick and another [2015] EWHC 3490 (Ch)

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